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TMI Blog2011 (4) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st June, 2004. In the months of April and May, 2004, the assessee incurred expenditure of ₹ 59,02,448. The details of the expenses have been mentioned on page Nos. 2 and 3 of the assessment order. These expenses were stated to be for the purpose of training of the staff etc. conducted from the premises belonging to a sister concern. The main dispute in this appeal is as to whether the aforesaid expenditure is deductible in Computing the income. The finding of the AO is that the expenditure has been incurred before the setting up of the business and its commencement. Therefore, the expenditure is not deductible in computing the income. Then, there is also a question regarding the rate of depreciation on the UPS, i.e., whether the rate should be 25 per cent or 60 per cent. The AO has allowed deduction of depreciation @ 25 per cent a$ against the claim of 60 per cent. The learned CIT(A) has allowed the appeal of the assessee on both the grounds. 2. In regard to ground No. 1, the learned Departmental Representative furnished same facts, which are tabulated hereunder : Sl. No. Date Remarks . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 396 of the paper book, which is the ledger account of the parent company. It shows three receipts on 7th April, 2004, 1st May, 2004 and 21st May, 2004 as advances. Advances have thereafter been received right upto 18th March, 2005. On 31st March, 2005, this account has been debited by a sum of ₹ 1,32,81,080 as service income . On this very date, this account has been further debited by an amount of ₹ 15,08,350 by exchange fluctuations , and the balance advance of ₹ 72,35,870 has been carried forwarded to the next year. 3. We have considered the facts of the case and submissions made before us. The facts are that the assessee has been incorporated on 19th March, 2004 for carrying out the business of the BPO. It incurred the expenditure of ₹ 59,24,809 under various heads in the months of April and May, 2004. The case of the learned counsel is that notwithstanding the fact that it started rendering services from June( 2004, the expenses are deductible. On the other hand, the case of the learned Departmental Representative is that these are the expenses incurred prior to setting up of the business. Therefore, since the business had not been set u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4.4 crores. The assessee had shown meagre interest income, which was taxable under the residuary head. The assessee claimed that the business had been set up. The AO did not accept this submission and computed the total income at ₹ 3,68,950. The Hon'ble Court mentioned that the assessee was in the business of developing software. For this purpose, it had acquired certain infrastructure facility and employed 30 to 40 persons. These persons were required to provide intellectual inputs for developing software. This activity cannot be compared with manufacturing activity as in the case of CIT v. Mohan Steel Ltd. (2004) 191 CTR (All) 279. Under the circumstances, it has been held that no substantial question of law arises. For the sake of ready reference, the relevant portion of the judgment is reproduced overleaf: It has been noted that the assessee had employed as many as 30 to 40 employees for the purposes of developing software and had acquired requisite infrastructure such as premises, utilities etc. during the previous year relevant to the assessment year. It must be remembered that the assessee was in the business of developing software and that cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completion of construction could not be taken as a commencement of the assessees business. The time-share resort business involves various stages of development. The first stage was setting up of one or more operating offices from which the sales personnel were sent to solicit customers, which the assessee had already started. The second stage was launching a massive publicity campaign, which the assessee had already been doing. In fact, it had already acquired land and started construction also, which were the subsequent changes. So, both the authorities below had given a finding that the assessee had commenced the business. For the purpose of development of the projects of construction, the assessee had to necessarily maintain regular staff members, on which it had been incurring expenses. The office expenses that had been incurred were clearly of revenue nature. Considering the reasons recorded by the Tribunal and based on the valid materials and evidences, the same does not suffer from any legal infirmity. 4.3 The learned counsel also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Whirlpool of India Ltd. (2009) 318 ITR 347 (Del). The facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 5(1)(xxi) of the WT Act, 1957, along with its proviso and the language of the main section and the proviso was wholly different. In the proviso, the requirement was specifically of the company commencing operations but in the main section the expression used was different, viz., of setting up of the unit. In the light of the relevant provisions, the facts of that case and the claim of the assessee to get the benefit of a deduction, the Supreme Court interpreted the provisions applicable to mean that actual commencement of business was necessary. The facts of the present case are, however, more in line with the decision of this Court in the case of CIT v. Hughes Escorts Communications Ltd. (2009) 311 ITR 253 (Del) 4.4 The aforesaid decision followed the decision in the case of CIT v. Hughes Escorts Communications Ltd. (2009) 311 ITR 253 (Del). The facts in this case are that the assessee-company was incorporated on 17th March, 1992 for carrying out the business of satellite communication systems for which a very small aperture terminal (VSAT) is required. The main objects are to provide products and services to the digital satellite market place in India and to init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 4.5 Having considered the facts and the jurisprudence, the relevant question to be examined is as to whether the business has been set up. After this event, revenue expenses are deductible in computing business income, even though the commencement of business may be on a later date. Coming to the decided cases, Akzo Nobel Car Refinishes India (P) Ltd. was a manufacturing concern. However, the relevant ratio is that if space has been hired, furniture and equipment purchased and directors appointed, even then business cannot be said to have been set up. E Funds International India, a company, was engaged in the business of developing software. It had acquired infrastructure facilities and employed 30 to 40 persons. The Tribunal mentioned that the activity cannot be an overnight exercise. The assessee had to put in consistent efforts for developing software and it is only thereafter that the business could be procured. Although the business was not procured, all steps necessary to obtain business including marketing had been undertaken. The facts are distinguishable to the extent that premises were not acquired. However, no publicity was required as it was intended to rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the equipment was to be installed in the rented premises and, therefore, it cannot be said that it was in possession of the premises from which the business could be solicited. 4.6 In the case of Bharti Cellular Ltd. in ITA Nos. 1737 and 1738/Del/2002, dt. 31st July, 2008, the Tribunal mentioned that the assessee acquired license in the month of November, 1994 and, thereafter it was in a position to start business. For this purpose, what is to be considered is whether essential activity in the course of carrying on the business has started. This decision was upheld by the Hon'ble Delhi High Court by mentioning that there is no perversity in the findings of the Tribunal. The SLP against this order was also dismissed by the Hon'ble Supreme Court. 4.7 When we look to the facts of our case, it is clear that although the staff had been recruited, it was not ready for rendering services as the staff had to be trained with the systems. The assessee had not taken premises on rent and, therefore, installation of computer therein had not been done. Therefore, the assessee was not in a position to solicit customers till the end of May, 2004. The advances were rece ..... X X X X Extracts X X X X X X X X Extracts X X X X
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